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Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?

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  • HESS CHUNG
  • JEAN‐PHILIPPE LAFORTE
  • DAVID REIFSCHNEIDER
  • JOHN C. WILLIAMS

Abstract

Prior to the financial crisis, most economists probably did not view the zero lower bound (ZLB) as a major problem for central banks. Using a range of structural and statistical models, we find that previous research understated the ZLB threat by ignoring uncertainty about model parameters and latent variables, focusing too much on the Great Moderation experience, and relying on structural models whose dynamics cannot generate sustained ZLB episodes. Our analysis also suggests that the Federal Reserve's asset purchases, while materially improving macroeconomic conditions, did not prevent the ZLB constraint from having first‐order adverse effects on real activity and inflation.

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  • Hess Chung & Jean‐Philippe Laforte & David Reifschneider & John C. Williams, 2012. "Have We Underestimated the Likelihood and Severity of Zero Lower Bound Events?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 44(s1), pages 47-82, February.
    • Handle: RePEc:wly:jmoncb:v:44:y:2012:i:s1:p:47-82
    DOI: 10.1111/j.1538-4616.2011.00478.x
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